Exam 3: The Time Value of Money Part 1

To determine the present value of a future amount,one should ________ the future cash flows.

A two-year investment of $200 is made today at an annual interest rate of 6%.Which of the following statements is true?

A $100 deposit today that earns an annual interest rate of 10% is worth how much at the end of two years? Assume all interest received at the end of the first year is reinvested the second year.

$100 invested at a rate of 5% for 10 years has the same future value as $100 invested at 10% compounded annually for 5 years.

The financial aid office at your university has offered to pay your full annual tuition cost of $22,000 this year,as long as you maintain a grade point average of 3.00.If tuition costs rise at a rate of 6% per year while you are in college,but the financial aid office continues to pay exactly $22,000 per year for your tuition,how much out-of-pocket tuition costs will you have your senior year? NOTE: Think carefully about this problem when figuring the number of years from the start of your freshman year to the start of your senior year,assuming normal progress toward graduation in four years.Further,be aware that while tuition costs are rising your tuition is covered up to only $22,000.You must pay any excess tuition costs.

The TVM equation FV = PV × (1 + r)n can be algebraically manipulated to solve for any of the variables EXCEPT for the time period n.

Kirby Puckett became the first $3,000,000 man in major league baseball in 1990.By 2008,A-Rod was bringing in $27,500,000 per year.Did the annual change in the highest annual baseball salary rise more rapidly over this time period than from 1930 to 1990? Babe Ruth had the highest salary and made $80,000 in 1930.

Your grandparents leave on their dream vacation to Antarctica in two years.The cruise vacation will cost them $25,000.If they have already saved $23,500 and are investing it at a rate of 2.75% per year,will they have saved enough money for their trip?

Dan Preston made $18,000 in the first movie he ever starred in.Dan soon made more and more movies and more and more money.At a 46.18% rate of salary increase per movie,how many movies did Dan make in order to earn $5,350,000 in a single movie?

The Millville School District had 3,071 students enrolled five years ago.Today,the district enrollment is 2,418 students.What has been the annual rate of change of student enrollment in the Millville School District over this time period?

You made your first $3,000 deposit today into a retirement account earning an average annual rate of 6%.How long will it take your deposit to reach a value of $50,000? How long will it take if instead you invest the money into an account earning 10% per year? After making your calculations,how does this information affect your decision-making regarding long-term investments?

Gasoline cost $.10 per gallon in 1930.Over the next 60 years,the price rose at an average rate of 4.42% per year.Based on this information,what was the average price of a gallon of gas in 1990?

The question "How long will I have to wait to reach a certain future value?" is best answered by which form of the TVM equation?

You wish to make a substantial down payment on a lake cottage and you currently have $18,325 invested at an annual rate of 4.75%.How much money will be in the account in 2.5 years if it continues to earn at its present rate?

Assume you put $2,000 into a tax-free investment and leave it there for 45 years at an annual rate of 8%.According to the Rule of 72,your investment will grow to a value of about $64,000.

Which of the following is the correct formula for calculating the future value?

The current price on a 60-inch flat panel LCD HD television is $2,300.Big screen HD television prices have dropped at an average rate of 9% per year in recent years.If you expect this trend to continue,how much will this style of television cost in three years?

Which of the following investments has a larger future value: A $100 investment earning 10% per year for 5 years or a $100 investment earning 5% per year for 10 years?

If interest rates are positive,then discounting increases the future value of an investment while compounding reduces the present value of an investment.

Sam wishes to invest $8,000 into an account earning 6% compounded annually.If he invests the money today,how much will be in the account in 6 years? If he waits three years before investing his $8,000 and invests that money for three years,will he earn one-half of the interest earned in the first scenario since he had the same amount invested at the same rate but for only one-half of the time? Explain how you arrived at your answer.